Stock Analysis

Here's Why Fiem Industries (NSE:FIEMIND) Can Manage Its Debt Responsibly

NSEI:FIEMIND
Source: Shutterstock

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Fiem Industries Limited (NSE:FIEMIND) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fiem Industries

How Much Debt Does Fiem Industries Carry?

The image below, which you can click on for greater detail, shows that Fiem Industries had debt of ₹357.7m at the end of September 2020, a reduction from ₹1.31b over a year. But it also has ₹1.24b in cash to offset that, meaning it has ₹884.5m net cash.

debt-equity-history-analysis
NSEI:FIEMIND Debt to Equity History December 22nd 2020

How Healthy Is Fiem Industries's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fiem Industries had liabilities of ₹3.35b due within 12 months and liabilities of ₹1.03b due beyond that. On the other hand, it had cash of ₹1.24b and ₹998.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.14b.

This deficit isn't so bad because Fiem Industries is worth ₹6.95b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Fiem Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Fiem Industries's EBIT fell a jaw-dropping 47% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Fiem Industries will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Fiem Industries has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Fiem Industries actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Fiem Industries's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹884.5m. And it impressed us with free cash flow of ₹2.5b, being 137% of its EBIT. So we don't have any problem with Fiem Industries's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Fiem Industries that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

When trading Fiem Industries or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


New: AI Stock Screener & Alerts

Our new AI Stock Screener scans the market every day to uncover opportunities.

• Dividend Powerhouses (3%+ Yield)
• Undervalued Small Caps with Insider Buying
• High growth Tech and AI Companies

Or build your own from over 50 metrics.

Explore Now for Free

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020


Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.

About NSEI:FIEMIND

Fiem Industries

Manufactures and supplies automotive lighting and signaling equipment, rear view mirrors, and sheet metal and plastic parts in India and internationally.

Flawless balance sheet, undervalued and pays a dividend.

Community Narratives

Priced for AI perfection - cracks are emerging
Fair Value US$90.15|44.027% overvalued
ChadWisperer
ChadWisperer
Community Contributor
NVDA Market Outlook
Fair Value US$341.12|61.937% undervalued
NateF
NateF
Community Contributor
Karoon Energy (ASX:KAR) - Buy Baby Buy 🚀
Fair Value AU$5.10|70.294% undervalued
StockMan
StockMan
Community Contributor